Fundamental Partnership Audit Reform, Part 1 How It Happened? D.C. Bar Panel Tuesday, February 2, 2016 at 12:00 p.m. Washington, D.C.

Transcription

1 Fundamental Partnership Audit Reform, Part 1 How It Happened? Moderator: Panelists: D.C. Bar Panel Tuesday, February 2, 2016 at 12:00 p.m. Washington, D.C. Donald B. Susswien RSM, Washington, D.C. Charles M. Ruchelman, Washington, D.C. Harold Hancock Tax Counsel, House Committee on Ways and Means, Washington, D.C. Gregory T. Armstrong IRS Office of Associate Chief Counsel, Washington, D.C. Ryan McCormick The Real Estate Roundtable, Washington, D.C. 1

2 I. Reasons for Change II. Industry Reactions Outline IV. Examples and Discussion 2

3 I. Reasons for Change 3

4 I. Reasons for Change 4

5 Industry Reactions II. Industry Reactions 5

6 A. TEFRA Repealed - Bipartisan Budget Act of 2015 TEFRA RIP 6

7 B. New Terms of Art 1. Partnership Representative 2. Imputed Underpayment 3. Reviewed Year 4. Adjustment Year C. New Tax Collection Concepts 1. Collecting from Partnership Default Partner Amended Returns within 270 Days of Notice of Proposed Adjustment 2. Electing Out on Timely Filed Return 3. Revised K-1 Procedure within 45 Days of Final Notice Special K-1 Push Out 7

8 B. New Terms of Art 1. Partnership Representative (section 6223) a. Party selected to represent partnership before IRS and make tax decisions b. Sole authority c. Not required to be a partner d. Person with substantial U.S. presence (under section 7701(a)(1)), includes individual, trust, estate, partnership, association, company, or corporation e. IRS will appoint if partnership does not f. Unlike TEFRA, partners do not have the right to participate in the proceedings or receive notice of proceedings from IRS. Section

9 B. New Terms of Art 1. Partnership Representative 2. Imputed Underpayment Net non-favorable adjustments to partnership tax year multiplied by the highest applicable tax rate 3. Reviewed Year (section 6225(d)(1)) Partnership tax year under audit. 4. Adjustment Year (section 6225(d)(2)) Year in which the adjustment for the reviewed year is made a. Year in which partnership adjustment becomes final under a court decision b. Year in which adjustment is made pursuant to an administrative adjustment request c. Year in which final partnership adjustment (FPA) is made (all other cases) C. Statute of Limitations on Assessment only determined at the partnership level. Section

10 A. Collecting from Partnership Default (section 6225) 1. As under TEFRA, tax adjustments will continue to be made at the partnership level. 2. However, unlike under TEFRA, unless a partnership is eligible to make an annual election and does in fact make the election, the tax attributable to an adjustment, and related interest and penalties, will be collected at the partnership level. 3. When the IRS makes a tax adjustment, the partnership s current partners (the adjustment year partners) will effectively pay the tax for the persons who were partners in the taxable year for which the adjustment was made (the reviewed year partners). 4. The tax to be paid is based on the imputed underpayment. 5. Penalties (and defenses) determined at partnership level. Section

11 A. Collecting from Partnership Default 5. Generally, the imputed underpayment is calculated at the highest marginal tax rate for the reviewed year (39.6%). 6. Reduction to Imputed Underpayment - A partnership can reduce the amount of the imputed underpayment or actual tax by: The reviewed year partners who file amended returns and pay the tax attributable to their allocable adjustment amounts. The partnership must submit information to the IRS sufficient to modify the imputed payment amount within 270 days after the notice of proposed adjustments. Regulations will provide for taking into account a lower rate of tax with respect to (a) ordinary income of a C corporation, (b) capital gain and qualified dividends of an individual, and (c) tax exempt partners (0% tax rate). IRS must approve modifications. 11

12 B. Elect Out on Timely Filed Return (section 6221(b)) 1. If a partnership has fewer than 100 partners and no partner is itself a partnership (or an entity that has elected to be treated as a partnership, like a limited liability company), then the partnership can make an annual opt out election on a timely filed tax return. Year-by-year election Provide name and TIN of each partner Query whether can elect out if partner is a grantor trust. 2. If a partnership elects out of the new regime, the partnership and partners will be examined under the rules applicable to individual taxpayers. Section 6221(b). 12

13 C. Revised K-1 Procedure (section 6226). 1. Within 45 days of receiving a notice of final partnership adjustment, any partnership, regardless of size, may elect out of the imputed underpayment process so long as it provides the IRS with a statement of each partner s share of any adjustment to income, gain, loss, deduction, or credit (as determined in the notice of final partnership adjustment). 2. Under this procedure, reviewed year partners calculate their share of additional tax due based on the statement (i.e., amended Schedule K-1) and the reviewed year partner will pay the additional amount with their respective current year individual tax return. 3. The added tax due from the partner is computed as if it were an amended return for the reviewed year with adjustments for tax attributes for later years. 13

14 C. Revised K-1 Procedure (section 6226). 4. An election under this provision increases the applicable underpayment interest rate by two percentage points. 5. Partners also liable for penalties. 6. Reviewed year partners have no right to an administrative or judicial review. 14

15 Examples and Discussion IV. Examples and Discussion 15